TORONTO — The global mining industry was forced to realign expectations in 2013, during one of the most difficult operating environments in recent memory, according to PwC’s annual Mine report.
According to new analysis of the largest 40 miners from PwC, no one was immune. Commodity prices, led by gold’s greatest annual decline in over 30 years, decreased significantly and mining values fell 23%. This, along with record impairments of $57 billion, means net profitability in the industry —down 72% to $20 billion— was at its lowest level in a decade.
Mine found that for the first time, 2013 saw the majority of the 40 largest mining companies come from emerging markets. Given their current performance and greater recent appetite to spend on capital, this trend is set to continue.
The change in the global mining landscape also saw a divergence in the collective performance between emerging market companies and their developed market counterparts. 2013 net profits from emerging market companies were $24 billion in aggregate, compared to an aggregate net loss of $4 billion for developed market companies, impacted particularly by impairments.
Against this backdrop, the license to operate in all corners of the globe is becoming more challenging, with governments increasingly eager to expand their share of royalties and taxes. Election results in 2014 in Brazil, India, Indonesia and South Africa may further alter the influence of emerging markets on mining.
Meanwhile, measuring the success of cost-saving initiatives will become more apparent this year, as operating costs did not slow in 2013 (up 4%) and free cash flow entered negative territory for the first time in the Mine series. Deferral of expenditure on significant capital projects was commonplace, particularly in light of current returns on capital employed against targeted project hurdle rates. There is a forecast capex of $116 billion in 2014, 11% lower than 2013 as capital velocity slows.
Maintaining dividend levels, exercising more selective capital allocation and active portfolio management are amongst the levers being pulled to restore investor confidence in the sector.
Quotes: John Gravelle, Global Mining Leader, PwC
“The industry is adjusting to tough times in the short-term with strategies in place to regain confidence. For example, we’ve seen new faces at the helm of almost half of the largest 40 mining companies in the last two years.”
“Despite diminished profitability and shrinking cash, underlying performance in the industry as represented by adjusted EBITDA withstood the tough conditions, only down 8% in 2013. Dividend yields continued to increase, with gross dividends paid up 5% and dividend yields slightly up to 4%.”
“The question remains as to who will be bold enough to thrive in these difficult times. M&A activity which was surprisingly subdued in 2013 seems to have started to pick up in early 2014. And backed by a stronger US economy and continued strong demand from China, the market is impatient to see demonstrable returns from recent strategic choices to deliver against the mantra of lower costs and higher productivity.”
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